RIP … “Twinkie the Kid”

Last Wednesday, the maker of Twinkies, Ho Hos and Wonder Bread placed the brands up for sale. A bankruptcy judge cleared the way for Hostess Brands, Inc., whose workers have been on strike, to fire those 18,500 workers and wind down its operations. A last-ditch effort to end a strike with Hostess’ bakers union failed Tuesday night and Judge Robert Drain on Wednesday approved the company’s request to shut down its business and sell the pieces to the highest bidder. The liquidation means the closure of 33 bakeries, 565 distribution centers, about 5,500 delivery routes and 570 bakery outlet stores, according to the company.

In January of this year, Hostess filed for Chapter 11 bankruptcy protection for the second time in less than a decade. Its predecessor company, Interstate Bakeries, which was founded in 1930, sought bankruptcy protection in 2004 and changed its name to Hostess Brands, Inc. after emerging in 2009. In reaching its decision to pull the plug on the operation, Hostess management stated that the company was already operating on razor-thin margins and that the strike was the final blow.

Hostess CEO Gregory Rayburn said repeatedly that he would have to shut it down unless a dozen unions accepted cutbacks in pay, benefits and modified union work rules. For example, union rules forced Hostess to run separate truck fleets for delivering bread and for delivering sweets. Most of the unions, including the Teamsters, agreed to the cuts in order to save the company. But the 5,600 workers in the bakers union at Hostess went on strike.

As Americans come to grips with the realization that snack food icons like Twinkies and Ho Hos will no longer be available, the finger pointing has begun as to “who killed ‘Twinkie the Kid.’” The union blames management and management blames the union. There are, in fact, several unions representing workers at Hostess Brands, Inc.

Obviously, the snack maker’s demise was years in the making and there are a number of factors involved. Outside analysts suggest that part of the company’s problems was the result of management missteps. At a time when Americans have been inundated with healthier food choices, even in the snack food market, Hostess failed to diversify by offering alternatives to their very tasty, but also very high in calorie, snack line. Some suggest that the types of snacks that Hostess makes are inconsistent with the healthier diet that Americans are seeking. This failure to change the business model may have also played a role in the final demise of Hostess.

There were other factors at play. Rising labor costs, mostly associated with healthcare, made keeping the bottom line in the black difficult for Hostess. The crippling strike by The Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, was the final straw. The union was asked to take an eight percent pay cut and pay 17 percent of their healthcare costs instead of current contribution level of zero percent. For this, they would have received 25 percent ownership of Hostess plus $100 million of Hostess debt to be paid back to the unions. While the Teamsters agreed, the Bakers Union passed on the offer.

The unions are blaming a decision the company made to take on almost $900 million in debt as part of the now-unsustainable debt structure facing Hostess. In addition, the unions point to millions in pay raises management had given itself while demanding worker cuts as further evidence that management was not operating in good faith, although Rayburn later rescinded the raises after he took the helm.

Wherever the blame lies, fans of the Hostess brand are now raiding stores to buy up the last of these artery-clogging snacks before they’re gone forever.

Forum Question of the Week:

“Was the recent declaration of bankruptcy by Hostess avoidable? Were the striking workers to blame or was the company’s business model flawed?”

Hostess bankruptcy: Another attack on unions

By Rana Odeh

“Hostess Brands is closed. We are sorry to announce that Hostess Brands, Inc. has been forced by a Bakers Union strike to shut down all operations and sell all company assets […]. Thank you for all of your loyalty and support over the years.”

This note, which I found on the front page of the Hostess website, while I was searching for the nutritional value of a Twinkie, clearly blames the Bakers Union strike for Hostess’ failure. Right wing media is certainly supporting the Hostess claim against the Teamsters, blaming unions for the demise of the company. However, Hostess has been on the decline for the past decade or so due to decreasing sales, CEO salary and bonus increases and snowballing debt, leading to the company’s second bankruptcy filing since 2004. Nobody can legitimately blame the most recent union workers strike for the downfall of Hostess when the mismanagement of the company began well before its 2004 bankruptcy filing. For many reasons, Hostess was never able to recover from the first filing: according to Fortune, its sales last year – $2.5 billion – were down about 11 percent from 2008 and down 28 percent from 2004. Overall, Hostess lost $341 million in fiscal 2011, two-and-a-half times the loss of the prior year – and by early 2012, primarily because of burgeoning interest obligations, its debt had grown to about $860 million.

Despite Hostess’ downward spiral, hedge funds were still investing in Hostess, because they would come out on top regardless of what happens to the company: an article in Fortune notes that Ripplewood, the private-equity firm that heavily invested in Hostess, badly wanted to keep Hostess out of bankruptcy. It pleaded with the lenders to show flexibility, but they were not so inclined. “The lenders held superior fiscal hands and had less downside if Hostess failed. In the event of a bankruptcy, given all the assets Hostess owned, the lenders would still walk away with millions” (Fortune, July 26, 2012).

While Hostess and others have found a convenient scapegoat in the union workers via their highly publicized nationwide strike, the fact is that the union workers already made great concessions in 2009 which lowered the wages of the employees who were lucky enough to keep their jobs amidst the downsizing of the company. As the company was crumbling to avoid bankruptcy, four top Hostess executives received raises of up to 80 percent, according to Fortune. This is in line with the average national trend: CEO pay grew 127 times faster than worker pay over the past 30 years in the United States. Between 1978 and 2011, CEO pay increased by 725 percent while worker pay increased by only 5.7 percent, according to a study by the Economic Policy Institute. During the same time period, worker productivity increased by 93 percent, according to the Federal Reserve Bank of St. Louis. The bottom line is that the top executives of Hostess, like other large corporations, received bonuses in the millions while their workers were making concessions, and yet the company blames its failure on the union workers for their very modest demands. The union workers already made their share of concessions, and their most recent strike was in objection to further pay cuts … they were not asking for the “ludicrous” demands to which some commentators have alluded.

Hostess cannot blame workers for the fact that Americans are becoming more health-conscious and the Twinkie … well … has not evolved to keep up with today’s health trends. Though Hostess has recently realized that Americans are a little wearier than they were in the past, and it introduced a “100-calorie snack pack” in 2007, then a “better-for-you SmartBakes” line in 2010. However, the products were still made with a thousand ingredients, excluding real food items such as cream, milk and butter. That makes me wonder, what the heck is inside that Twinkie and how do they pack it in there to total only 150 calories each? Even McDonalds has made a better attempt than that to appeal to more health-conscious eaters by adding salads and fruits to its menu. Hostess really needs to suck it in … I mean up, and blame its mismanagement and lack of innovation for its downfall.

“We deeply regret the necessity of today’s decision, but we do not have the financial resources to weather an extended nationwide strike. Hostess Brands will move promptly to lay off most of its 18,500-member workforce and focus on selling its assets to the highest bidders,” Gregory Rayburn, Hostess’s restructuring expert-turned CEO, stated in his interview with ABC News. He went on to add “I think we’ll find buyers […] a few have surfaced already since Friday expressing interest in the brand to acquire them.” It is true that Hostess was rolling around in debt due to mismanagement, and sales have decreased considerably in the past decade due in part to a more health-conscious public, but the Twinkie is not going anywhere, for better or for worse. Hostess still brought in $2.5 billion, with Twinkies as its highest seller in 2011. For those of you who cannot live without your 37-ingredient cake-thing with a white not-cream filling, have no fear, Hostess will be bought off by another company that will hire non-unionized workers – probably in another country – just like many other American corporate bankruptcy cases, and you will have your Twinkies in no time.

Rana Odeh is a DCP Debate Forum freelance writer. She holds a BA in English and Philosophy from UD and is currently a graduate student in the ICP Program at Wright State University. Reach Rana at
RanaOdeh@DaytonCityPaper.com or view her work at RanaOdeh.com

Hostess executives, unions cannot use Twinkie defense

By Rob Scott

One of the greatest aspects of the United States and what made our economy the top in the world is capitalism, the theory of business being privately owned and creating goods or providing a service for profit. The system allows individuals to risk their money in ownership of business for the prospect of earning money.

The reward for someone who starts or owns a business is the hope for them to make a profit. Profit is derived from all revenue minus expenses such as labor, cost of business and paying the taxman. If there are more expenses than revenue, then you have a deficit. In almost all circumstances, no one goes into business or owns a business to not make money.

Typically, the largest expenses in any business and in government are costs for labor or those associated, such as health care or retirement. For the system to work, both business and labor must work together.

A perfect example of capitalism at work is when Sam Walton started the Walton’s Five and Dime in Bentonville, Ark., now known as Walmart. His primary purpose for starting his own business was for him to make money. Walton’s goal was to provide a grocery store with products within it that were very competitive against other grocery stores. Obviously, he became very successful at doing just that by using free market principles. Now, Walmart is one of the nation’s largest employers and its third most valuable. Walmart employs hundreds of thousands, providing a steady income for thousands of families.

The Hostess Brand, Inc. debacle is a perfect example of the demise of capitalism currently underway in the United States. Hostess, who made Twinkies and Ding Dongs, has been struggling for close to a decade for a number of reasons.

The Irving, Texas-based company employs 18,500 people, most belonging to unions. Earlier this year, Hostess had filed Chapter 11 bankruptcy attempting to restructure its debt. A new CEO was named in order to reorganize the company. Hostess has been dealing with a rise in fuel costs, ingredient costs and demand for healthier snacks, and the U.S. recession hit the company hard, leading to bankruptcy.

Hostess executives said work rules from existing labor agreements made it impossible to improve productivity and spend funds efficiently. An example cited in news reports is how rules required different Hostess workers to deliver bread, cakes and other products, essentially doubling delivery costs. To make matters worse, the company had massive debt obligations totaling $700 million due to a 2004 bankruptcy and an unfunded employee pension plan.

As part of the restructuring and turning Hostess around, the new CEO Gregory Rayburn asked the employee unions to compromise on their wages and employee benefits packages. To show good faith, Rayburn cut top level executives’ pay at Hostess to $1 per year.

During and after the 2008 financial crisis, union auto workers and other unions readily agreed to concessions deemed crucial for the survival of their respective companies. Those companies in return kept their doors open and the employees retained their jobs.

A strike is one of the most potent weapons a union has in a dispute with management. Through the negotiations between management and the unions, the unions decided to strike. Rayburn warned the unions if they did strike, it would cause the 82-year old company to close its doors for good. After a court-imposed labor contract that cut wages, health care benefits and retirement benefits, the unions at Hostess went on strike and now the company is shutting its doors permanently.

The union leadership seemed to have decided to cut off their nose to spite their face. Though the union may have viewed Hostess executives’ threat of closing as a negotiating tactic, they now have to contend with a tragic situation. Instead of negotiating about the terms of their members’ employment, there now is no employment to even negotiate. But as the Hostess situation clearly shows, the risks that a strike will backfire are high – especially when employers can hit their ejection seat, such as bankruptcy or shuttering unionized operations.

Hostess executives put the blame on the intransigence of the Bakery, Confectionery, Tobacco Workers and Grain Millers Union. One union, the Teamsters, didn’t vote to strike Hostess and begged the other unions to find a way out of the confrontation.

Unions and their representatives claim the executives bear substantial responsibility for Hostess’ woes. They claim the company failed to invest in new products, bungled pricing strategy and didn’t reduce expenses.

Ultimately, neither party truly has clean hands in this situation. The Hostess executives, including their CEO, needed to do a better job at selling to the employees the benefits of a strong and renewed company. In return, the employees needed to realize that Hostess is not in the business of employing individuals, but rather at making a profit. In order for the company to make a profit, the executives are required to cut expenses which include labor costs and maximizing revenue through sales.

Due to neither side coming to their senses, no one wins. Maybe it was from all the sugary snacks.

Rob Scott is a practicing attorney at Oldham & Deitering, LLC. Scott is the Chairman of the Montgomery County Republican Party and the founder of the Dayton Tea Party. He can be contacted at rob@oldhamdeitering.com or www.gemcitylaw.com.